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Know which properties to avoid

At any given time there could be over 350,000 properties for sale in Australia but in my mind less than 5% are what I would call “investment grade”, so let’s look at what type of property a property investor should not buy.

Firstly let’s explore…

Properties the banks don’t like

There are certain properties that the banks don’t seem to like and against which they will lend a lower Loan to Value ratio, meaning you’ll need to fork out a bigger deposit.

More importantly, if the banks are wary of them, rather than thinking you know better, take it as a warning sign and consider looking elsewhere.

In general, the banks restrict lending to properties that appeal to a limited resale or tenant market including…

  1. Serviced apartments – which carry a lot more risk than buying an ordinary apartment as you’re relying on the operator to get it right and on the tourism and business markets to remain strong to maintain occupancy.These properties have a limited resale market (since only investors buy them you’re cutting out up to 70% of potential purchasers), a limited letting market and often have expensive ongoing management costs. apartment hotel
  2. Department of Defense Housing accommodation – while these properties come with the certainty of long leases and no ongoing maintenance, they have a limited resale market and hefty management charges.
  3. Small units – most banks prefer apartments to comprise at least 50 square metres of living space, not including balconies or car parking.However, with our changing lifestyles some will now lend on properties that are 40 square metres in size.
  4. Studio apartments and student accommodation – these also have restricted markets because of their size.
  5. Large off the plan developments – banks worry about a “concentration risk” and therefore restrict how many apartments they will lend on in some large new complexes.Of course there are lots of other potential issues with off the plan properties that would make me wary of this type of investment.

Other properties I would avoid

  1. Out of place – I only buy properties that fit in with the overall character of their neighbourhood. While I love terrace houses, if the property happens to be the only terrace in a street full of bungalows, I’d look elsewhere and buy a property consistent with the streetscape. 
    1-percent
  2. The wrong location in the street – Even the best streets can have sections with an unattractive mix of properties or that are too close to the shops or main road. Choose livable streets and make sure you buy the right property in the right section of the street.
  3. Encumbrances on Title – Check the title carefully for easements, covenants or overlays that could restrict your capacity for future extensions or rebuilding.
  4. Other Title Troubles – Banks will restrict their lending for apartments on some older forms of title, such as company-share or stratum titles.
  5. Body Corporation Problems – When buying an apartment carefully peruse the minutes of the last few owners’ corporate meetings. Are there any issues with the building or excessive expenses planned? Has a sinking fund been set up to handle future repairs or refurbishment?
  6. No Car parking – While absence of parking may save you some money today, it will always limit an apartment’s appeal to tenants, homeowners and future investors. property plan apartment build develop construction_new
  7. Wrong position in the block – Avoid apartments in sub-optimal positions in the block. You know what I mean… the ones overlooking the car park or situated near the waste bins.
  8. Avoid main roads and secondary locations – Sure people live everywhere but when the market slows secondary properties are harder to sell and fall in value first.
  9. Rental guaranteed apartments – remember the cost of the rental guarantee (which is usually inflated to make the return look better than it really is) is added to the purchase price and used by the developer to justify inflated prices. In other words you’re paying the developer up front to guarantee the rent for you. And it’s not uncommon for the rent to drop when the rental guarantee period expires, leaving you with a hole in your budget.
  10. Holiday Homes or Apartments – I’m not suggesting don’t buy yourself a weekend getaway property if you can afford it. What I’m saying is don’t pretend you’re buying it as an investment,  apartmentbecause you’re likely to end up with an asset that on the one hand isn’t meeting your lifestyle dreams and on the other, doesn’t deliver your financial objectives.
  11. Mining towns – These markets tend to have little market depth from owner-occupiers and being more investor driven tend to be more volatile and best avoided.
  12. NRAS – The National Rental Affordability Scheme is a federal government initiative designed to tackle the issue of affordable housing where investors receiver a tax incentive to provide housing at below market rental rates. Again a very specialized type of property.

The lesson from all of this is that if you want your property portfolio to outperform, you need to own the type of property that will appeal to a wide demographic of owner-occupiers who in general make up the bulk of purchasers, tend to buy emotionally, pay higher prices and push up the price of properties similar to yours.

To top it off, these are the types of property the banks are willing to lend 80%, 90% or sometimes even 95% on.

Now that’s interesting isn’t it?

SO WHAT CAN YOU DO?

If you’re looking for independent property investment advice, no one can help you quite like the independent property investment strategists at Metropolequestionmark house

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat.

Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Know which properties to avoid' have 12 comments

  1. Avatar for Property Update

    September 5, 2014 @ 12:16 pm Alex

    Dear Michael,

    I disagree with your point on serviced apartments. I own many serviced apartments for many years , more than a decade and they have proved to be solid investments. They are high yield properties that help finance my purchases of other negative geared properties.Your point ” a lot more risk than buying an ordinary apartment” in my case this is not true as over the many years the operators have never missed a monthly rent, I get paid whether the units are occupied or not , unlike my ordinary apartments which have at least a few weeks unoccupied , which I still consider pretty good.
    On the point they are for investors only, well yes but the FIRB consider serviced apartments with long leases as commercial properties ( Guidance Note 6 FIRB ) and therefore open to purchase by foreigners and foreigners find their yield very attractive as oppose to ordinary units. Also foreigners are not allowed to buy from the secondary market and are confined to off plans and new properties which are over priced. If more foreigners are aware of this fact, serviced apartment would enjoy a boom.So” cutting out 70% of potential purchasers” does not hold as what about cutting out the % of potential purchasers who are foreigners from the secondary market. Not too easy to sell ordinary apartments in the secondary market either.

    Your point ” often have expensive ongoing management costs” usually the operators paid for most outgoings , body corporate etc, owners contribute toward Capital works and other minors costs which all added up far less than an ordinary apartments. A net yield of about 7% is achievable for serviced apartments which is hardly possible for ordinary apartments.

    A mixture of both is a good strategy where the serviced apartments act as Cash cows to finance the ordinary units. Banks are happy to see I have serviced apartments in my portfolio and are even willing to provide loans of almost 100% for my purchase of other apartments. Without the serviced apartments I could not have built the property portfolio that I have.

    Regards,
    Alex

    Reply

    • Avatar for Property Update

      September 5, 2014 @ 6:53 pm Michael Yardney

      Alex
      Thanks for your comments. Clearly you’ve done very well investing in serviced apartments. Congratulations.

      My opinions are based on the many, many people who come to our offices who have done poorly and are stuck with properties they’ve had difficulty selling.

      I’ve painted with a broad brush.

      Reply

  2. Avatar for Property Update

    September 6, 2014 @ 6:08 pm John

    I would also avoid 1 bedroom apartments where the bedroom does not have an external window, or apartments where the width of the living room is less than 4 metres.

    Reply

    • Avatar for Property Update

      September 6, 2014 @ 6:32 pm Michael Yardney

      You’re right John I wouldn’t buy any apartment where there is no plenty of natural light

      Reply

  3. Avatar for Property Update

    January 14, 2015 @ 8:59 am George

    Just read the comments on the serviced apartments by Alex after reading your article, I agree the article is very broad. Also I know an investor who has been investing in NRAS properties. Now I know he is thinking out of the box here and bought NRAS properties in potential suburbs, in good streets and have done really well. Of course he has other non-NRAS properties in the portfolio. He is very happy with the NRAS because, guess what, whose property is going to be rented out quicker than the others in that block? He doesn’t mind the low yield as we all agree property is not about cash flow rather capital growth. So I guess strategies could be different for buying property. As you have mentioned before, it is probably better to avoid such properties but if your strategy is different such properties could be a great asset in your portfolio. As you always say one needs to have a plan and based on this plan you could think out of the box.

    Reply

    • Avatar for Property Update

      January 14, 2015 @ 5:19 pm Michael Yardney

      George
      Thanks for the comment – clearly your friend has a plan, a strategy and this means he’s already on the right path

      Reply

  4. Avatar for Property Update

    July 24, 2015 @ 1:47 pm Wayne

    Hi
    what exactly is secondary locations?

    Reply

    • Avatar for Property Update

      July 24, 2015 @ 3:35 pm Michael Yardney

      That’s a good question Wayne
      There are many factors to location. Simple ones are avoid main roads or too close to shops schools industries etc. But that alone is too simplistic.
      We would only buy properties that if you put on the market not only today, but in quieter times, would havea flood of potential owner occupiers lined up to buy them

      Reply

  5. Avatar for Property Update

    July 26, 2015 @ 12:22 am Stu

    Hello Michael,
    Would not retirees buy serviced apartments to live in? If so, with the enormous wave of retiring and downsizing baby boomers expected in Australia over the next couple of decades I would think they could make a great owner-occupier-appealing investment.

    Reply

    • Avatar for Property Update

      July 26, 2015 @ 12:39 am Michael Yardney

      Stu I ant see retirees wanting to live in serviced apartments. They are not meant for owner occupiers, but for short term tenants who pay a premium to live there

      Reply

  6. Avatar for Property Update

    March 25, 2016 @ 10:24 am Eric

    Hi Michael,

    It’s true what you said before that there is an oversupply of units and apartments in the capital cities. Will it be a good strategy to take advantage that market condition to negotiate to a very affordable price? I am sure a lot of people would desire to live in near the city, it’s just the property there are to pricey..What do you think?

    Reply

    • Avatar for Property Update

      March 25, 2016 @ 10:43 am Michael Yardney

      NO – bad investments are cheap for a reason – others know something and are not buying these properties – don’t become a casualty like so many others have

      Reply


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